Economic Growth: Drivers and Forecasts

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In a landscape marked by low domestic inventories, the risks associated with economic "downturns" appear relatively limitedHistorical patterns have demonstrated a negative relationship between actual interest rates and inventory behaviors, where inventory cycles tend to lag behind changes in interest ratesAs of the end of December 2023, actual interest rates have significantly decreased from a historical peak of 9.9% in June of the same year to 7.1%. This downward trend indicates a more pronounced “bottoming” characteristic in inventoriesAdditionally, the upward signals being transmitted through capacity cycles could provide robust support to the economy, as observed in the past three quarters where capacity utilization rates rose from 74.3% to 75.9%.

In the United States, a "restocking" cycle is underway, and there are signs of improvement in China’s external demandCertain sectors in the U.S. have already initiated restocking practices, with the growth rate of actual retailer inventories increasing from 6.3% in June 2023 to 8.5% by January 2024. The restocking efforts in manufacturing are notably heterogeneous, predominantly focusing on industries such as transportation, chemicals, metals, and textilesBeyond the logic of restocking, the revival of the U.S. real estate market is likely to positively impact Chinese exports in furniture and related machinery.

Furthermore, there is considerable assurance regarding fiscal support, which could significantly bolster the economyThe extent of economic recovery is closely tied to the intensity of fiscal policies in place; for instance, the growth rate of general fiscal budget expenditures for 2024 is projected to rise to 7.9%, surpassing the 3% deficit target that implies a nominal GDP growth of 7.4%. This indicates a substantial increase in fiscal support for the economy

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Mechanisms like the PSL (Pledge Securities Loan) and renewed loans for technological upgrades have been introduced, and historical data suggests that such "quasi-fiscal" measures often yield positive outcomes in their targeted sectorsThe discrepancies observed in macro and micro data at the beginning of the year are atypical, leading to an accelerated push for policy implementation.

The macroeconomic data observed at the beginning of the year appears "spectacular," influenced significantly by the "working day effect." In January and February, industrial production and investment demand have warmed up notably, exceeding expectationsFor instance, industrial added value is a key indicator reflecting the output volume of industrial production over a specific time frame, which is influenced by factors such as production length and efficiencyNotably, the total number of working days in January and February reached 40, the highest since 2010, which is two days more than in 2023; this "working day effect" yields a positive contribution to overall economic metrics, particularly amplifying year-on-year readings of relevant indicators.

However, the slow realization of physical workload reflected in microdata can be attributed to disruptions caused by extreme weather events and delays in the issuance of special bondsThe post-holiday resumption of work coincided with severe freezing rain, impacting the flow of people and disrupting the production rhythms of construction and related industriesConsequently, the asphalt utilization rate fell to a low, with grinding production rates declining by 7% year-on-yearAdditionally, the slow pace of issuing special bonds since the start of the year could also be a significant factor, as only 16.3% of the year's quota was issued in the first quarter, compared to the usual 40% in prior years.

As we have yet to achieve a stable recovery in the economy, there will be no shifts in the policy orientation aimed at "stabilizing growth." The "counter-cyclical" regulatory measures will continue to maintain a strong momentum

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The temporary inflation of data due to the "working day effect" will not alter the overall policy directionReferring to recent experiences, in the second half of 2020, as the economy began to recover, both general fiscal expenditures and social financing growth rates continued on an upward trajectoryShould the downward pressure on the economy intensify, supplementary policies may be introduced in a timely fashion, similar to the implementation of policy financial tools in the third quarter of 2022 and the reactivation of the PSL.

In evaluating economic growth using the production approach, a notable increase in the service sector's contribution is evident, with its share continuously risingThe service sector overtook the secondary sector in terms of GDP share in 2012 and reached 54.6% in 2023. Within the secondary sector, construction and mining industries have maintained a stable overall proportionConversely, while the manufacturing sector's GDP share has slightly receded, the structural aspects continue to optimize, showing that the high-tech manufacturing sector's contribution to industrial added value grew to 15.7% by 2023.

Based on the production method of calculating GDP, achieving the economic growth target is not overly challenging, with a full-year GDP year-on-year growth possibly reaching 5.2%. Pertaining to the secondary sector, there is reinforced momentum in midstream equipment manufacturing, which showed an added value increase of 8% year-on-year in 2023; its revenue share overtook the processing and smelting sector, climbing to 42%. Equipment manufacturing is expected to sustain a "high prosperity" status, potentially driving second-sector GDP growth by approximately 4.5% year-on-yearOn the demand side, the initiation of inventory restoration may contribute between 0.1 to 0.4 percentage points to GDP growth.

The driving force exerted by the tertiary industry on the economy could further strengthen

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